I am always amazed at how we tend to forget the age old Golden Rule, you don’t know what that is? here it is – “The one with the Gold makes the rules”, this blog post is motivated by the article written by Om Malik the founder of GigaOm, I got a chance to meet Om when GreenQloud was participating in Structure Europe, the conference focused on Cloud Computing. Om talks about how the financial system was disrupted by the Day Traders and others in the late 90s, he could not be more wrong about this. The financial system is still run by a few Whales, namely Goldman Sachs, JP Morgan, Morgan Stanley and Bank of America. The amount of money that these institutions control is staggering. I can go into the details of the numbers but why spoil a good story with facts :) The financial system or Wall Street has always been about self preservation and unlike what Om says, nothing has changed in Wall Street, the players have changed but the game continues on. The rules that are made are always biased towards those who run the financial system. The life blood of our system is Money and disrupting the way finance works is going to be hard but change is happening. The rise of AngelList and other ways to fund startups is extremely positive and provides alternatives but I am of the opinion the ones who really control the capital will control how these rules are made. The more alternatives that exist for entrepreneurs to build things of value, the better it makes the ecosystem. More recently, my friend Alex wrote about Convertible Royalties, a way to get early stage funding without the hockey stick growth that is expected when VCs get involved with a company. I think there is merit to that way of thinking.
I used to work in a bank incase you did not know and I have seen how capital brings ideas to reality. Here is a graph of the Federal Reserve Systems Money Supply, since the recession of 2008, the exponential growth in money supply has been touted by many pundits and I don’t want to do the same but show that this is unprecedented. The first graph is M1 Money Supply, the second graph is M2… where M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal
(NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler’s checks, demand deposits, and OCDs, each seasonally adjusted separately. M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs). Seasonally adjusted M2 is computed by summing savings deposits, small-denomination time deposits, and retail MMMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.
When one looks at the above two graphs, it is obvious that M1 is increasing exponentially whereas M2 is linear, so money is being pumped into a system to keep it going. This system is wall street. I would list the balance sheet of all the above whales of Wall Street and it would be obvious where the actual money is being pushed into.
- The Golden Rule (corimagua.wordpress.com)
- Is the Golden Rule the Antidote to Bullying? (theclearparent.com)
- The Golden Rule… (thedailysisterhood.wordpress.com)
- U.S. M2 Unchanged W/W (valuewalk.com)
- M1 Money Supply vs. Real GDP (globaleconomicanalysis.blogspot.com)
- Get the Facts About Certificates of Deposit (CDs) (ally.com)
- U.S. Money Supply Increases Week Over Week? (valuewalk.com)